Bank of England minutes: Strong pound risks exacerbating deflation

Jessica Morris
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The Bank of England is worried about the strength of the pound (Source: Getty)

Bank of England policymakers think the strong pound could exacerbate the current period of low inflation.

Minutes released today showed the monetary policy committee believes divergent monetary policy trends, and a strengthening economy, could cause the pound to appreciate further.

"This has the potential to prolong the period for which consumer price inflation would remain below the target and exacerbate the risk that lower expectations of inflation might become more persistent," the minutes said.

The rate of inflation has been languishing below the Bank of England's two per cent target for more than a year, largely due to the global oil price rout, as well as supermarket competition which has depressed food prices.

Earlier this month governor Mark Carney warned low inflation outside of the UK, as well as a strong sterling, could cause the central bank to push back a rate hike.

"It may be appropriate to take into account persistent external deflationary forces arising from the combination of continued foreign low inflation and the protracted effects of sterling’s strength on the prices facing U.K. consumers if those forces were to intensify," he said during a speech in Sheffield.

While the minutes noted a "range of views" were held across the nine-strong monetary policy committee, all members agreed it was "more likely that not" interest rates would rise over the next three years.

Nonetheless, there were two committee members who said this month's decision had been "finely balanced." This is likely to have come from Martin Weale and Ian McCafferty, who recently reversed their calls for a hike.

Last week Weale said a rate hike remained "finely balanced" as "pulls in both directions have intensified". He said the fact wages were rising without a corresponding pick-up in productivity was confounding rate-setters.

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